Heather, we'll start with you; what impact is the Australian dollar at these levels going to have on manufacturing?

HEATHER RIDOUT: Well, two-thirds of our members say they can't be competitive at 80 cents. 93.7, say they can't be competitive at 85 cents. So at approaching 93, 94 cents, I mean it is a very, very tough equation indeed.

STEPHEN LONG: So what precisely is the impact? How bad is it going to be?

HEATHER RIDOUT: Well it means that in export markets you less competitive and grossly less competitive against import competition in your domestic market, you lose share.

And over the lasts decade, Australia's lost 21 per cent of it's world market share and that is a very big drop and it's something we need to think about.

STEPHEN LONG: Mike Rafferty what would you say to that?

MIKE RAFFERTY: I would probably say that the story's a little bit more complex.

It used to be that we could say the Australian dollar goes up, it's going to be harder for exports, but that's not necessarily the case these days. Most companies, especially if you look at banks, the miners, they've got fairly sophisticated hedging practices and the old national story that was clear has definitely become much more company-specific.

It may be less so in manufacturing because they got used to the 50 cent dollar, and so hedging was probably not as important, but certainly with these big volatile swings in the currency, companies are just gonna have to get used to it.

STEPHEN LONG: Heather Ridout is it fair to say that the tools are available in the international market place for companies to hedge currencies and if they haven't taken the appropriate steps, then that's their own risk?

HEATHER RIDOUT: Not all companies are great big companies with access to sophisticated financial derivative modelling and knowledge. Most exporters are small companies. Now, it's not easy for them to do it.

The 10 per cent of our manufacturing exporters that hedge are mainly big companies and the small ones really have to take some pretty rudimentary steps to try and offset it. So, it's not necessarily a level playing field there.

MIKE RAFFERTY: Well even if Australian companies have hedged their currencies, the hedges don't last forever. The Australian dollar, according to many economists is heading for parity and beyond; you could call it the "Buzz Lightyear currency", so, are things gonna get really, really bad down the track Mike Rafferty?

MIKE RAFFERTY: It's hard to say. It's important to remember that this is not such a story about the Australian dollar appreciating, this is really about the US dollar depreciating against virtually every other currency.

So the net affects of this US dollar depreciation really have to be looked at in terms of what are the net affects of the Australian dollar against, say the Japanese Yen? And that's been much more stable.

HEATHER RIDOUT: The dollar has though, appreciated against the trade-weighted index and even though the US dollar has a fairly major role in that weight, it does mean that we're less competitive against a lot of our trading partners in Asia and also, we have moved upwards against the Pound and the Euro, now not by as much.

I think it's a major issue and against the Yen for example that's distorting trade flows. You know if you're with Toyota it's a good news story, if you're with Holden it's a very bad news story. So there's a lot of things going on within this exchange rate story and I agree with Mike it is a complex story from many different perspectives.

STEPHEN LONG: Well speaking of Toyota. It's given a warning that it may no longer be viable to produce cars in Australia if the Australian dollar keeps appreciating. Do you think that's a serious threat?

MIKE RAFFERTY: You know, it's hard to know whether Toyota's using a political strategy to ramp up its protection and some more government hand-outs or whether this is serious.

HEATHER RIDOUT: Toyota's not a protection seeking company. It's a very agile, adroit company. Very smart. Best technology in the United States. Not unionised so it doesn't face some of the problems that Ford and General Motors are latterly incurring.

So what they say has to be taken seriously. And I think the fact is this is the sharp side of the resources boom. When you have companies that don't get the benefit of high prices but have all the competitive losses in the local market and in export and third country markets.

There's not much we can do about it. We certainly shouldn't put up interest rates in this kind of environment, because you're punishing two-thirds of the economy.

STEPHEN LONG: Well Ken Henry, the Secretary of the Treasury has argued that resources will move in line with the movements in success, in effect. So, we have a resources-based economy, the resources exporters are doing well. If resources move to those states and manufacturing withers on the vine, no problem. First of, I'll ask Mike Rafferty what you would say to that?

MIKE RAFFERTY: Not being a market fundamentalist, I wouldn't necessarily agree with that. I think the key point is, exchange rates move about for no apparent reason. There are no necessary fundamentals about why the Australian dollar's appreciating. It's just one of those things?

STEPHEN LONG: Heather Ridout?

HEATHER RIDOUT: Well, I think it's tough. Australia does have a truly freely floating exchange rate in contrast to many of our trading partners. Now, skills moving from NSW to Western Australia in pursuit of higher paid jobs, that's one thing, but when you have a lot of hot money coming into Australia because of an interest rate differential, that's quite another thing.

Now if we want to run an economy, which looses investment, looses jobs and that's acceptable because of hot money pushing up our exchange rate that is a really tough outcome.

STEPHEN LONG: So you are arguing in effect that there needs to be some kind of global action to stop countries, such as China, artificially suppressing their exchange rates?

HEATHER RIDOUT: Well I think if we're going to have this argument about tariffs around the world we should be having the same argument about exchange rates. I mean one per cent movement in the exchange rate is equal to a 2.5 per cent tariff. So it's a much bigger issue and in this world where we have global markets, global integration, free movements of resources across borders etc. this is the major determinant of the competitiveness of industries.

Now China is in a tough position, it has appreciated about 9.3 per cent since the Yuan was sort of floated, but there's a long way to go in that argument.

STEPHEN LONG: Mike Rafferty is that a fair point? That we really don't have a level playing field? Australia has a fully floating exchange rate and other countries are manipulating theirs, including countries such as China?

MIKE RAFFERTY: There's no doubt that when one country's floating and others can use it as an economic policy tool that it creates difficulties.

One thing I would say that if the Yuan does start to appreciate, we could paradoxically see global inflation start moving up and that would create all sorts of other problems in the economy.

STEPHEN LONG: Is the high Aussie dollar just a blip, a short-term thing? Or do you think that this is a semi-permanent shift if the level of our currency?

HEATHER RIDOUT: Can I say that if it is more than a blip and if it's sustained at these levels for some time, more than six to 12 months, you will see this increasingly reflected in company's business plans.

A number of those hedging arrangements will expire and have to be reset, so what we'll see is more and more activity go offshore, which we've seen over the last couple of years, it's accelerated, well it will accelerate further.

We'll be able to rename ourselves the Australian Importers Group, because that's basically the bottom line.

MARK COLVIN: Heather Ridout from the Australian Industry Group, and with her, Dr Mike Rafferty from Sydney University, speaking to Stephen Long.